E-commerce has transformed the business landscape in India, creating new taxation challenges. With over 600 million internet users, this sector is expanding rapidly, requiring a well-structured tax framework. The taxation of e-commerce in India is primarily governed by The Goods and Services Tax (GST) Act, 2017, along with The Income Tax Act, 1961, and The Finance Act, 2016, which introduced the Equalization Levy.

Legal Framework Governing E-Commerce Taxation

• Goods and Services Tax (GST) Act, 2017 – GST is the primary indirect tax law applicable to e-commerce transactions in India. Key provisions include:
  • GST Registration Requirement: Under Section 24 of the CGST Act, 2017, all e-commerce operators and sellers using online platforms must register for GST, regardless of turnover.
  • Tax Collection at Source (TCS) – Section 52: E-commerce operators (e.g., Amazon, Flipkart) must collect 1% GST on net taxable sales and remit it to the government.
  • GST on Inter-State Transactions – Section 5 of IGST Act, 2017: Integrated GST (IGST) applies to cross-border and inter-state transactions to prevent tax evasion and ensure proper revenue distribution.
  • GST on Digital Services: Foreign digital service providers (e.g., Netflix, Google Ads) must register under GST and pay tax on services provided to Indian consumers.
• Income Tax Act, 1961 – Direct Taxation on E-Commerce
  • Tax on Business Income: E-commerce sellers must declare their profits and pay income tax as per applicable corporate or individual tax rates.
  • Presumptive Taxation for Small E-Commerce Sellers (Section 44AD): Small businesses with turnover up to ₹2 crores can opt for presumptive taxation, paying tax on 8% of their gross receipts.
  • Withholding Tax (TDS) on E-Commerce Transactions – Section 194-O: Introduced in the Finance Act, 2020, e-commerce operators must deduct 1% TDS on payments made to sellers exceeding ₹5 lakh annually.
• Equalization Levy (Finance Act, 2016 & 2020)
  • Equalization Levy on Digital Advertising (2016): 6% tax on online advertisements paid to non-resident entities (e.g., Google, Facebook) by Indian businesses.
  • Equalization Levy on E-Commerce Transactions (2020): 2% levy on gross revenue of foreign e-commerce companies providing services or selling goods in India without a physical presence.

Challenges in E-Commerce Taxation

Despite a robust legal framework, taxation in e-commerce faces several challenges:

• Compliance Burden: Frequent changes in tax rates and compliance requirements create difficulties for small and medium-sized enterprises (SMEs).
• Cross-Border Jurisdiction Issues: Collecting tax from foreign e-commerce platforms remains complex due to differing international tax laws.
• Valuation and Classification Disputes: Misclassification of digital services and goods leads to tax disputes.
• Tax Evasion Risks: Many small sellers operate without GST registration, causing revenue leakage.

Government Measures to Improve Tax Compliance

• GST Council Reforms: Simplified GST return filing and reduced compliance burden for small e-commerce sellers.
• Use of Data Analytics: The government leverages AI-based tax monitoring to track e-commerce transactions and detect evasion.
• Strengthening International Collaboration: India is aligning its e-commerce tax policies with OECD's Base Erosion and Profit Shifting (BEPS) framework to prevent profit shifting by multinational companies.

Conclusion
The taxation of e-commerce in India is evolving through The GST Act, Income Tax Act, and Equalization Levy. While GST has streamlined indirect taxation, issues related to compliance, cross-border transactions, and tax evasion remain. The government's reforms and international collaborations aim to create a transparent, effective taxation system, ensuring fair revenue collection while supporting e-commerce growth.

Written By:

• Plakshi Gupta - Manav Rachna University, Faridabad And
• Amritansh Bansal - Manav Rachna University, Faridabad